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Variable Overhead Efficiency Variance:

Definition and Explanation:

Variable overhead efficiency variance is the difference between budget allowance based on actual hours worked and budget allowance based on standard hours allowed.

If the budget allowance based on actual hours worked is more than the budget allowance based on standard hours allowed, an unfavorable variable overhead efficiency variance occurs.

If the budget allowance based on actual hours worked is less than the budget allowance based on standard hours allowed, a favorable variable overhead efficiency variance occurs.

Variable overhead efficiency variance is calculated when overall or net overhead variance is further analyzed using four variance method. Other three variances that are calculated in four variance method are overhead spending variance, fixed overhead efficiency variance and overhead idle capacity variance.

Formula:

Following formula is used for the calculation of this variance:

Variable overhead efficiency variance = Budget allowance based on actual hours worked - Budget allowance based on standard hours allowed

Example:

From the following data calculate variable overhead efficiency variance:

Actual overhead   $7,384
Actual hours worked   3,475
Units produced during the period   850
Standard hours for one unit   4
Standard factory overhead rate:    
     Variable

$1.20

 
     Fixed

$0.80

$2.00
 
 
Normal Capacity in labor hours   4000 hours

Solution:

Budget allowance based on actual hours worked:    
  Budgeted fixed expenses 3.200  
  Budgeted variable expenses (3,475 actual hours $1.20 standard variable rate) 4,170 7370
 
 
Budget allowance based on standard hours allowed:    
  Budgeted fixed expenses 3,200  
  Budgeted variable expenses (3,400* actual hours $1.20 standard variable rate) 4,080 7,280
 

Variable overhead efficiency variance (Unfavorable)    $90 unfav
   
*850 4 = 3,400    

When variable overhead efficiency variance and fixed overhead efficiency variance are combined, they equal the overhead efficiency variance.

Relevant Articles:

Definition and Explanation of Standard Cost
Purposes and Advantages of Standard Costing System
Setting Standards
Materials Price Standard
Materials Price Variance
Materials Quantity Standard
Materials Quantity Variance
Direct Labor Rate Standard
Direct Labor Rate Variance
Direct Labor Efficiency Standard
Direct Labor Efficiency Variance
Factory Overhead Cost Standards
Overall or Net Factory Overhead Variance
Overhead Controllable Variance
Overhead Volume Variance
Overhead Spending Variance
Overhead Idle Capacity Variance
Overhead Efficiency Variance
Variable Overhead Efficiency Variance

Fixed Overhead Efficiency Variance

Mix and Yield Variance
Variance Analysis Example
Standard Costing and Variance Analysis Formulas
Management by Exception and Variance Analysis
International Uses of Standard Costing System
Advantages, Disadvantages, and Limitations of Standard Costing

 

 

A D V E R T I S E M E N T

 

Financial Accounting Topics


  Introduction to Accounting
 ----------------------------------------------------------------------------
  Transactions and Accounting Equation
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  Analysis of Business Transactions
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  Journal, Ledger and Trial Balance
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  Accounting for Bills of Exchange
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  Special Journals
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  Cash Book
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Bank Reconciliation Statement
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  Final Accounts
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  Work Sheet
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  Capital and Revenue Items
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  Valuation of Inventories
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  Accounts of Non-profit Making Organizations
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  Statement of Cash Flows
----------------------------------------------------------------------------
  Accounting Ratios Analysis
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  Depreciation, Provisions and Reserves
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  Accounting Dictionary
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  Financial Calculators
 
 
 
Managerial Accounting Topics

  Financial Statements
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  Cost Volume Profit Relationship
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  Variable Costing System
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  Materials and Inventory Cost Control
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  Activity Based Costing System
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  Standard Costing and Variance Analysis
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  Balanced Scorecard
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  Capital Investment Analysis/Capital Budgeting
 

 

 

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